Insights & Advice


What’s up with the Stimulus Plan?

With the unemployment rate at 9.5% and an economy that continues to give mixed signals about a recovery, both economists and politicians are talking about the need for a second stimulus plan. I suggest it may be a good idea to first examine why the existing stimulus plan may not be working as well as it should.

Whether the Administration “misread” the economy, as Vice President Joe Biden claimed on television last weekend, or simply “we did not have enough data” as President Obama said in a subsequent statement is really not the issue. In my opinion, unemployment is the issue as it is both upfront and personal and a visible sign of recession to most of us. It scares the Be Jesus out of consumers and creates fearful and often times unhappy voters come election time.

Now one can argue that Americans simply lack patience. After all, very little of the stimulus money has been spent and it will take time before the $787 billion trickles through the economy. Another argument made by the Administration is that without the stimulus money unemployment would be far higher than it is, which I believe is a fair comment. Finally, we are reminded that the unemployment numbers are a lagging indicator of the economy and do not give an accurate picture of where we are heading.

It is true that the unemployment rate lags the economy, but new claims for unemployment benefits are a leading indicator. Those claims peaked in March at about 674,000 lost jobs. In times past new claims have fallen sharply from peak levels, but not this time. Since the peak (22 weeks ago) we are still seeing substantial new claims in the 600,000 area although the latest week came in at 565,000 claims, the best so far. That indicates that although things may be improving, they are doing so at a snail’s pace. In addition, two other leading indicators, temporary workers and hours worked, are both continuing to decline.

So why isn’t the stimulus having a bigger impact on job growth? Well, one reason could be the nature of the present job losses, which have inordinately impacted teenagers (22.7%), and adults who lack a high school diploma (14%) as compared to those with a college degree (4.6%) according to the Center for American Progress. That should be no surprise to readers. Wages and jobs for lesser skilled and uneducated labor in this country have been falling for years. Those jobs have been shipped overseas in increasing numbers to places like China and India.

“Sticky wages” is another explanation. Companies have found it easier to reduce output and cut employment rather than drop wages among their workforce. The minimum wage and labor contracts can also hamper wage reductions. This phenomenon makes the old relationship of economic recovery and wholesale job creation less correlated than in the past. It appears that American business during the last few recessionary periods has shed unskilled and uneducated laborers and substituted by hiring more educated and higher skilled workers coming out of each recession.

The original concept of President Obama’s Stimulus Plan, The American Recovery and Reinvestment Act of 2009, was intended to put Americans back to work through massive infrastructure projects which were “shovel ready”. This made sense on two levels. Our Bridges, highways, levees and schools are crumbling after over a century or more of disrepair. Infrastructure is also good for business growth which would spur economic recovery. It would also employ many in that segment of society which has been hit the hardest by this recession, the unskilled or less- educated worker. Unfortunately, by the time the House and Senate got through with the stimulus package, just $111 billion was left for infrastructure and science, $280 billion went to tax relief, another $144 billion went to state and local municipalities to fill budget gaps and the final $155 billion went to healthcare, energy and education.

All those areas were certainly worthy of assistance during this recession but if the purpose of the act was to alleviate unemployment and jump- start the economy then the money (what little of it that has been dispensed) has been misplaced, in my opinion. The President ran on a platform of healthcare, alternative energy and education among other issues. I’m sure he had the best of intentions by using some of the stimulus money to address those areas. The problem is those areas require long- term investment and payback will be measured over decades not months. The majority of the funds ($424 billion) were spent on tax relief which has little impact on job generation although it does go a long way in preventing further job losses especially at the state and local level.

Still some of the money has had an impact. All you have to do is drive down Route 8 in Cheshire or Route 22 in Columbia County to see our stimulus plan at work patching pavement and potholes. I just wish more of that money was out there generating jobs.

Is it too late to turn things around? Probably. I can’t imagine our elected politicians re-writing the act or even dispensing the funds at a more rapid pace. You see, much of the money is ear-marked to be spent in the administration’s third year in office. That’s not an unusual tactic in politics. It insures that running for re-election in the following year will be aided and abetted by the tailwinds of large-scale government spending.
So given that most Americans are already fairly cynical about both the stimulus program and the financial bail-outs the government has implemented thus far, it is hard for me to believe that they will go for another round of spending, especially with the trillions in debt we already owe. That leaves patience, something many voters may find hard to accept when economists forecast the unemployment rate could top 11% or more. Fortunately, elections are still a good ways off so there is still a window of opportunity to get it right. Let’s hope they do.

Posted in Macroeconomics, The Retired Advisor